Is a First Party Special Needs Trust Right for Your Client?

Disabled individuals who expect to receive settlement proceeds may need to consider placing the proceeds into a trust account to preserve assets, protect government benefit eligibility, and help ensure that their needs are being met. A First-Party Special Needs Trust (sometimes referred to as a “d4A trust,” as a nod to the section of federal code it references) may be a viable option for individuals who meet certain eligibility requirements. Disabled individuals under age 65 who are currently receiving needs-based benefits (e.g., SSI, Medi-Cal, etc.), are typically eligible for a First Party Special Needs Trust (SNT).

How is the trust funded?

A First Party SNT is a “self-settled” trust, which simply means that the assets used to fund the trust belong to the beneficiary—in this case, settlement proceeds. The settlement proceeds can be used to fund the trust directly, or alternatively, the proceeds can be used to purchase a structured settlement, which can then fund the trust. The structured settlement option may offer additional levels of tax benefits for the disabled individual.

Why is a First Party SNT a useful financial tool?

If a disabled individual is receiving needs-based government benefits like SSI and Medi-Cal, the acceptance of money from an injury settlement will likely cause them to exceed the asset threshold for eligibility. For many disabled individuals, even those who receive larger settlements, the settlement proceeds alone may not cover a lifetime of medical care. Costs such as doctor visits, medication, physical therapy, home modifications, medical equipment, and in-home care can quickly eat away at a settlement, making it vital to maintain access to government benefits. By directing the proceeds into an SNT, the disabled individual may be able to maintain benefit eligibility while supplementing their benefits with trust distributions.

What types of goods and services are eligible for distribution?

Strict federal and state guidelines determine how the funds in an SNT can be spent. Here are some common examples of goods and services that may be eligible for distribution:

• The purchase of a home or paying off a home mortgage
• Home modifications to accommodate the individual’s disabilities; home furnishings or appliances
• The purchase of an automobile and/or paying for registration and insurance
• Payment for medical expenses and/or bills not covered by Medicaid (Medi-Cal) or Medicare
• Dental treatment, eyeglasses, physical therapy, or support services not covered by government benefits
• Education expenses (including a computer and software, textbooks, etc.)
• Entertainment/recreation expenses
• Debt payoff (e.g., credit cards, etc.)
• Personal hygiene (e.g., haircuts, etc.)

Interested in learning more?

For more information about First Party Special Needs Trusts, contact Traci Kaas. Our experienced settlement planners can provide the information and assistance your clients need to set up their trusts.